City Loses $1 Million On Bonds

Williamsubrg Suing Crestar Over Advice

February 10, 1995|By BENTLEY BOYD Daily Press

Williamsburg decided Thursday to take a $1.02 million loss to get out of some long-term investments that have taken a beating in the past year and to sue Crestar Securities for giving the city bad investment advice.

The City Council agreed to sell $5.1 million of its $12.6 million portfolio to convert its shaky federal and government bonds into short-term securities.

"Holding onto these is like gambling with the public's money," Councilwoman Jeanne Zeidler said. "We could hold onto them for awhile and maybe the market goes up, and maybe it goes down. But we want to minimize our risk. Some of these we should have never had in the first place."

Williamsburg is selling securities with variable interest rates and "derivative" securities whose worth is based on the rise and fall of other commodities.

On advice from Crestar officials, Finance Director Ray Adams switched in 1992 from investing in short-term certificates of deposit to investing in federal and municipal government bonds and securities with later maturities to increase returns, City Manager Jackson C. Tuttle has said.

But those investments have lost about $1.02 million of their purchase price because a rise in interest rates caused a collapse in the bond market in 1994.

The council has retained a Richmond law firm that specializes in banking law and Thursday authorized the firm to file suit against Crestar for unspecified damages, said City Attorney Joseph Phillips Jr.

Council also asked Tuttle to advertise a request for proposals from other banks interested in providing the city with financial services, Phillips said.

The drop in the value of the city's bonds could be regained by holding the long-term bonds to their maturity, but Tuttle recommended the city sell the bonds to end the headache.

After the meeting, Tuttle described the loss as being "necessary to get the portfolio back into line with acceptable risk. The city shouldn't be worrying about which way interest rates are going."

Tuttle said the city is not in danger of bankruptcy. Williamsburg took in $1.3 million more in its last fiscal year than it did the year before and carries a cash balance of $3.5 million.

But it faces about $8 million in construction projects in the budget year that begins July 1. Mayor Trist McConnell asked whether the city would have that $8 million, and Tuttle said it would with the combination of the ready cash and the conversion of the long-term investments into short-term securities, which the city can access when it needs the money.

"As a result of these transactions, the city's current income will increase moderately, and future income will be much more stable under different market conditions," Tuttle said.

The $1.02 million loss is cushioned by the $800,000 the city made in the past two years on its investments, Tuttle said. The city figured that profit by measuring the interest it made on the riskier investments vs. the interest it would have earned on certificates of deposit.

"And now we will reinvest this money at higher interest rates to recoup some of the loss. The net loss is a whole lot less than it was initially reported it would be," Tuttle said.

Last month, the council set an investment policy that says no more than half of the investment portfolio will have maturity dates beyond 12 months and that no investments will have maturity dates longer than 36 months without written authorization.

Thursday, the council agreed to immediately sell off all securities with maturities longer than 72 months on the advice of Tuttle and the city's new investment advisers, Commonwealth Investment Counsel of Richmond.

The other city investments that have maturity dates longer than 36 months will be sold within the next three years to bring them into line with the new policy, Tuttle said.

DERIVATIVES

* About half of the $5.1 million in Williamsburg's portfolio was in derivative securities, or securities with variable interest rates, City Manager Jackson C. Tuttle said. Derivative securities were the investments that Orange County, Calif., had that led to that county's financial problems last fall.

* "The major issue with Orange County was that they had leveraged investments," Tuttle said. "They had borrowed money to make more investments. This doesn't have anywhere near the impact on us, because we're not going into bankruptcy. It doesn't affect our operating budget at all."